Optus HFC deal kills monster govt created

Summary:Two weeks since NBN Co announced its game-changing agreements with Telstra and Optus, most subsequent discussions have focused on the ex-monopolist rather than its biggest rival. Yet while many have argued that Optus is getting an $800 million free ride, few have recognised that decommissioning the Optus HFC network embodies the significant failings of 14 years of competition just as much as the buyout of Telstra's ducts.

Two weeks since NBN Co announced its game-changing agreements with Telstra and Optus, most subsequent discussions have focused on the ex-monopolist rather than on its biggest rival. Yet while many have argued that Optus is getting an $800 million free ride, few have recognised that decommissioning the Optus HFC network embodies the significant failings of 14 years of competition just as much as the buyout of Telstra's ducts.

Remember that while Telstra grew organically through the decades, Optus was created — enabled might be a better word — from the wreck of AUSSAT, then backed by favourable legislation that enabled it to seize a foothold in the market. Its mandate was to introduce Telstra to the supposed ravages of competition, and the company climbed the learning curve quickly. So, too, did the Labor and Coalition governments regulating it.

The winter of his content: Optus CEO Paul O'Sullivan knows the company's future lies in content — but how will it shape up? (Credit: David Braue/CBS Interactive)

Yet the mistakes started early: a core premise behind Optus' creation was that it should build a second physical customer access network to compete with Telstra's, and that network was, of course, to be based on the then high-tech hybrid fibre-coaxial (HFC) cable. Yet with all the enthusiasm about the presence of an anti-Telstra, nobody considered what an absolute waste of money this would be. Logic said that Optus and Telstra could have worked together to bring HFC infrastructure to a much bigger portion of Australia, but the competitive spirit in which Optus was hatched meant that this wasn't possible.

Even back then, the government could have well and truly anticipated the train wreck that was coming — but blind political pressure, to prove that the new competitive environment was delivering consumer outcomes, kept it from forcing the point. Instead, it left Optus to try to fight the colossus that is Telstra, using only the strength of its HFC and its gut determination.

Whether by design or by happenstance, Optus carried the burden of building its own HFC network and, with the blessing of a government that was keen to promote appearances of competition at any cost, rather than undertaking the less palatable separation of Telstra, it drag raced Telstra through our suburban streets, only to run out of funding long before it had managed to fulfil its vision of building an alternative local loop.

Customers were spoiled for choice in a marketing sense, but with two networks covering 20 per cent of Australian homes, and one network covering 100 per cent of them, the dynamics of today's ADSL marketplace were already beginning to play out. Optus was counting on content to build revenues in the face of a commoditised access business, but big bucks partnerships with US content providers simply didn't resonate with customers as the company hoped. Even less so when a bigger Telstra was feverishly securing key deals to build out its own content proposition.

Optus was counting on content to build revenues in the face of a commoditised access business, but big bucks partnerships with US content providers simply didn't resonate with customers as the company hoped.

Content-focused duopolies quickly went the way of the dodo, and Telstra's bundling strategies, larger market size, better advertising, exclusive content agreements and iron grip over ADSL-equipped local loops left Optus little wiggle room. It wasn't long before Optus was backing away from its pay TV roots, ceding the pay TV market to Telstra and redoubling its focus on mobiles to compensate. Yet while Optus' cable business and bundled HFC local-loop businesses may have been tidy little revenue spinners over the years, networks like this cost an absolute fortune to maintain. It can't have been long before the costs of the HFC network, compared with its return and growth rates, began raising concerns.

If the government had separated Telstra from the get-go, and forced it to allow competitors to have access on its new HFC network, Optus would never have needed to spend billions duplicating that roll-out, and we'd have more of the country cabled with a (relatively) open, wholesale access network. Years later, Optus knows as well as anybody how expensive and bothersome it is to own your own infrastructure, and I imagine that — even though the deal could be diminished by what is estimated to be up to $100 million in early termination payments — CEO Paul O'Sullivan struggled to play hard-to-get when NBN Co offered him $800 million to close up shop.

Not only does that put a fair bit of dosh into Optus' war chest, but it relieves the company of the burden of maintaining an infrastructure that has always been redundant. We now know that the future for Optus — and, indeed, for any carrier — lies not in owning massive duplicate consumer networks, but in exploiting available telecommunications services to deliver services and content to customers as effectively as possible. The NBN has made this very clear, but Optus' challenging content model was already hinting at this years ago.

Optus spent billions to be able to offer the same connectivity services as Telstra, but when it came to content, the government-backed competitor could never shake that perception that it was a "me-too" player. Even though it has a strong business footprint, in the consumer market it simply was never able to give most consumers a good enough reason to choose it over Telstra; in addition, its TV-optimised network has lost any technical advantage it might have had. To this day, its remaining pay TV operations are performing so badly that Optus excludes them from its consumer revenue results, so as to be able to report stable revenues.

Little wonder that O'Sullivan used his recent speech at the CeBIT conference in Sydney as a platform to attack the proposed Austar-Foxtel merger, and agitate for more openness in content: he knows all too well that exclusive content deals favour Foxtel's market reach. Telstra regularly beats Optus handily in securing exclusive content, thereby removing most of the incentives for customers to choose an Optus pay TV package over a Telstra package.

Optus' experience with its HFC network has been a learning experience for all involved, but decisions made in the 1990s have now come home to roost. Those that argue that the government had no business buying out Optus seem to have forgotten this; the government is shelling out billions to absolve itself of its 1990s-era mistakes, and this deal is as much a part of that as NBN Co's deal with Telstra.

Telstra naturally lashed out at the suggestion, and there are questions as to how much the government can interfere in private sector content deals. That said, the direction of a post-HFC Optus will be of great interest: freed of its expenses in duplicating Telstra's HFC network, can Optus use its cash to turn a corner in Australia's content services market? Or will it simply focus on NBN content, working to turn its customer base onto the prospects of a new era of content deals?

Optus' experience with its HFC network has been a learning experience for all involved, but decisions made in the 1990s have now come home to roost. Those that argue that the government had no business buying out Optus seem to have forgotten this; the government is shelling out billions to absolve itself of its 1990s-era mistakes, and this deal is as much a part of that as NBN Co's deal with Telstra. There will be no piggybacking on top of Foxtel this time, since every ISP will have the ability to deliver pay TV services over a network that's as fast as the HFC network that Optus spent billions to build. This time around, the competitive landscape is far more level, and means of market differentiation will be different; so, too, will be the Optus that emerges.

HFC nobbled, where does Optus' future lie? Can it ever be more than a pale imitator of Telstra when it comes to consumer services? Will it always be forced to compete as a cut-rate provider, or will freeing it of HFC allow it to spread its wings and find important new business directions?

As large as the US mainland but with a smaller population than Texas, Australia relies on ICT innovation to maintain its position as a first-world democracy and a role model for the developing Asia-Pacific region. Award-winning journalist David Braue has covered Australia’s IT and telecoms sectors since 1995 – and he’s as quick to draw le...
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